It's a move that will benefit many of Nashville's hospital companies and one that may spur more expansions and replacement facilities in areas where patients often leave to receive outpatient care.

The update proposed by the Centers for Medicare & Medicaid Services applies to sole community hospitals and comes on top of a 3.2 percent inflation update also recommended for outpatient procedures at all acute-care hospitals. The changes will boost the top lines of some providers, but had little impact on the stock prices for various area rural hospital chains.

David Frederiksen, chief operating officer at hospital lender Pine Creek Healthcare Capital LLC, says rural providers likely won't build stand-alone ambulatory centers, which are increasingly common in the Nashville area. Instead, new centers would be replacement facilities that provide both inpatient and outpatient care while seeking more updated designs.

"A rural hospital in 2005 is operating in a building that was built in 1945 when we all lived in an inpatient hospital world," says Ray Brooks, CEO of West End-based Pine Creek. "That is delivering health care with an inpatient infrastructure even though we're living in an outpatient world."

CMS' move to hike reimbursements - which still needs Congressional approval - is good news for Middle Tennessee's rural hospital companies, from the big boys Community Health Systems Inc. and LifePoint Hospitals Inc. to smaller and newer ventures like Attentus Healthcare Co. and Capella Healthcare. For them and their peers, it's an instant margin boost.

Almost half of LifePoint's $1 billion in 2004 revenues, for instance, came from Medicare or Medicaid. At Community Health, the figure was about $1.4 billion - 42 percent of 2004 revenues of $3.3 billion. While not all of that revenue comes from outpatient services - both companies' revenues are split pretty evenly between in- and outpatient work - it's a safe bet CMS' move will positively affect tens of millions of dollars.

Coinsurance rates to fall further

The 6.6 percent increase applies to hospitals that are a region's only provider and stems from a study of hospital costs authorized in 2003's Medicare Modernization Act.

Brooks says capital markets have historically penalized rural hospitals as riskier than their urban counterparts, but says many of the rural centers are well-run businesses. Nevertheless, they have a tremendous need for capital, Frederiksen says.

Many have turned toward the federal critical access hospital program that gives certain designated hospitals extra Medicare funding to keep in the black. And the creation in 2000 of an outpatient prospective payment system, which pays hospitals a pre-determined rate for each Medicare admission rather than a cost-based rate, followed the successful implementation of such a system for inpatient services at hospitals in 1983.

CMS says the changes will further lower the coinsurance rates Medicare beneficiaries pay for outpatient procedures. Surpassing 50 percent in August 2000, enrollees will continue to see their rates fall until they reach one-fifth of the hospital bill. Because the government is paying more of the bill, hospitals are assured of more money.

With these changes and higher volume, CMS payments for outpatient procedures will rise 5.4 percent next year to $27.5 billion.